Exercise 2: The Real Risk That Holding Cash Also Carries — Possible Solution ==================================================================== The claim "holding cash is completely safe" is only true if "risk" is narrowly defined as market volatility - the day-to-day ups and downs an invested portfolio experiences. Under that narrow definition, cash genuinely never loses nominal value; the number on a bank statement doesn't go down. WHAT THIS FRAMING LEAVES OUT This chapter's own real, worked comparison shows a different, equally real kind of risk: inflation risk. Held as cash for 20 years at 2% inflation, £10,000 doesn't shrink in nominal terms - the number stays exactly £10,000 - but its real purchasing power falls to approximately £6,730. That is a genuine, guaranteed loss of about a third of the money's actual value, not a possibility that might or might not happen, but something that happens with near certainty as long as prices keep rising at anything close to a normal rate. WHY THIS COUNTS AS A REAL RISK, NOT JUST A DIFFERENT OUTCOME "Risk" in a financial sense means the chance of ending up with less real value than you started with or expected. Cash held for the long term essentially guarantees this outcome under normal inflation conditions - it just does so slowly and predictably, rather than through visible, dramatic swings the way an invested portfolio's own value moves. Calling investing "risky" while calling cash "safe" only captures one narrow kind of risk (volatility) while ignoring another, equally real kind (purchasing-power erosion) that cash is actually more exposed to over a long time horizon, not less. WHY THIS MATTERS FOR THE COMPARISON This is exactly why the chapter's own real comparison matters: the same £10,000 invested for 20 years, even after accounting for that same 2% inflation, still ends up worth roughly £26,042 in real terms - nearly four times the cash figure. The "safe" choice was, in real terms, the worse outcome by a wide margin. ANSWER: The claim overlooks inflation risk - a real, near-certain risk that cash is actually more exposed to than an invested portfolio over the long term. While cash never loses nominal value, this chapter's own worked example shows £10,000 held as cash for 20 years loses real purchasing power to approximately £6,730 under ordinary 2% inflation, a near-guaranteed erosion rather than a mere possibility. Calling investing "risky" while calling cash "safe" only accounts for market volatility risk and ignores this second, equally real risk category, which is precisely why the same £10,000 invested still ends up worth roughly £26,042 in real terms - nearly four times more than holding cash, despite investing's own real volatility along the way. WHY THIS WORKS AS AN ANSWER ------------------------------ This identifies the specific, narrower definition of "risk" the friend's claim relies on, names the real risk category (inflation) that definition leaves out, and ties the explanation directly back to this chapter's own real, computed figures rather than making the point in the abstract.